On theÂ 2010 rise in bankruptcy filings:Â my understanding is that there are three major categories of debt that “tip” people over the edge. Credit card debt, made more difficult to vacate after theÂ 2005 BAPCPA change. Student loans, which areÂ almost impossible to vacate, andÂ medical debt which is still possible to vacate. With few benefits for bankruptcy relating to student loans or credit card debt,Â medical-debt bankruptcy is now the leading cause of the increase. It makes sense as there is little other incentive beyond mortgages, but most people just mail the key in for that.
I was talking to a friend who attended private schools through a masters degree, and in the process, accumulated over 50k in student loans. She negotiated a $100 a month payment on her loans. I pointed out that when you run her numbers through aÂ debt calculator like the one on CNN money, it returns the error “the amount you plan to spend each month is not enough to ever pay off your loans.”Â Ever. If you say you want to pay that debt off in 20 YEARS at 8% her minimum monthly payment would be $415. She has a good job and controls her expenses, but there is no way she can spare over $400 a month. She works in a field that is stable, but with little chance for huge pay increases. The bottom line is, she will never ever pay off this debt and bankruptcy won’t eliminate it.Â What is she supposed to do?
My friend is behind the eight ball for life.
For my friend the indentured student, the solution was to not accumulate the debt in the first place! Right? But really, when a private university offered her the loans as a freshman, how many of us would have actually had the clarity of thought to say “No, I don’t see how I can reasonably pay that back based on my economic predictions of the US economy and my likely earning potential five years from now. I’m gonna go back to community college for a few more years.“Â Most 18 year olds don’t think like that.